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SIMPLE IRA

Q: Why do small business owners (100 employees or less) start SIMPLE IRAs?
A: Potential tax-deferred retirement income and tax advantages.

Self-directed SIMPLE (Simplified Incentive Match Plan for Employees) Individual Retirement Accounts can become great employee benefit vehicles – and they may also help your business manage its taxes.

How do SIMPLE IRAs work? IRAs are set up for you and your employees, funded by salary reduction contributions. The annual contribution limits can be much higher than that of a standard IRA. They are currently $13,000 per year and $16,000 for employees over the age of 50. These limits are subject to cost-of-living adjustments, so they may rise over time.1

As your employees defer salary into their IRAs, you can either match their contributions up to 3% of their annual compensation or just contribute a flat 2% of their compensation into the account per year.2

As a business owner, you are also allowed to make both employer and employee contributions to your own SIMPLE IRA. So, you could, in theory, contribute as much as $13,000 a year – or $16,000 a year, if you are older than 50 – and then have your company match up to 3% of your employee contribution on top of that.3

Employees are always 100% vested; salary deferrals into the IRA are purely elective. Participants can invest IRA assets in many different ways, and those assets may benefit from tax-deferred growth until they are distributed.2,4

Like withdrawals from traditional IRAs, withdrawals from SIMPLE IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions (RMDs).

These plans don’t normally require Internal Revenue Service filings. They are also straightforward to set up and run. In addition, your business may be eligible for a tax credit of up to $500 per year for the first three years the plan is in place, per I.R.S. Form 8881.5

Please note that the information in this material is not intended as tax or legal advice, and may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

  1. irs.gov/pub/irs-pdf/p4334.pdf [11/18]
  2. irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan [6/18/19]
  3. fool.com/retirement/2019-guide-retirement-savings-plans-ira-401k.aspx [10/21/19]
  4. nerdwallet.com/blog/investing/what-is-a-simple-ira-and-how-to-open-one [4/18/19]
  5. irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit [7/15/19]

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